Research
Research Projects
On-the-run Premia, Settlement Fails, and Central Bank Access (JMP)
The premium on "on-the-run" Treasuries is an anomaly. I explain it using a model in which primary dealers hold inventories of Treasuries. Primary dealers are more likely to hold large inventories of the most recent issues of Treasuries (i.e., on-the-run Treasuries). Because on-the-run Treasuries are easier to find, they trade at a premium. My theory is consistent with the USD 40 billion of Treasury contracts that fail to settle each day, with the median failure rate of off-the-run Treasuries being almost twice that of on-the-run Treasuries. I use the model to analyse the effects of granting access to central bank facilities to non-banks active in the Treasury market. Broad access stimulates trading and reduces the on-the-run premium, but settlement fails increase and, counterintuitively, only primary dealers benefit.
Anonymity in Credit-Based Payment Systems (WP)
with R. Taudien
Payment systems can be broadly categorized into two types: Token-based payment systems (such as cash) that depend on the quality of the token exchanged, and account-based payment systems (such as credit cards) that are based on the threat of punishment in case of default. It is commonly assumed that only token-based systems can provide anonymity because user anonymity prevents punishment. However, this is not necessarily the case. In an environment where agents use accounts (such as wallet addresses) to interact with each other, an account can provide a complete history of past actions without revealing the identity of its owner. Although individuals cannot be punished directly, accounts can face consequences such as loss of reputation. We demonstrate the existence of an anonymous credit-based payment system. However, we show that maintaining anonymity in such systems is costly.
Transaction Costs, the Price of Convenience, and the Cross-Section of Safe Asset Returns (Draft soon available)
with R. Juelsrud, P. Nenov, and O. Syrstad
We study the cross-section of safe asset returns using a tractable asset pricing model with multiple safe assets, agent heterogeneity, transaction costs, and aggregate risk. The model is stylized but rich enough to accommodate both a demand for convenience (liquidity), as well as standard portfolio choice by investors. We use the model to characterize the equilibrium interactions across safe assets due to asset supply effects as well as the interactions between aggregate risk and the demand for convenience. Changes in the supply or in the transaction costs of a single safe asset affect the liquidity premia on all assets via the aggregate price of convenience. Similarly, in our framework, changes to the composition of safe assets also impacts liquidity premia. Therefore, our model can be used to understand the asset pricing effects of Central Bank interventions such as Operation Twist or more recently Quantitative Easing programs. In our framework such interventions impact asset prices (but also welfare) in the economy via the aggregate price of convenience. Finally, we show that increases in aggregate risk or risk aversion affect liquidity premia and the price of convenience via a safety value channel, which ends up decreasing liquidity premia. The main channel for this effect is a valuation effect on risk-free (safe) assets from higher aggregate risk due to a flight to safety adjustment in agents' portfolios. We test the predictions of our model using data on US Treasury yields and changes in Treasury supply.
Consistent with our theory, we show that the term premium between longer maturity Treasuries and 3 month Treasury bills increases with the supply of high maturity bonds and decreases with the supply of shorter maturity bonds. It also increases with the MOVE index, which measures yield volatility of US Treasuries -- which is closely correlated with illiquidity and transaction costs in the Treasury market. However, it actually decreases with the VIX, consistent with our safety value channel. Overall our tractable model can be useful for analyzing the asset pricing effects of Central Bank market operations as well as unconventional monetary policies.
One-sided Market Pressure and Interest Earnings: an Explanation for Covered Interest Rate Parity Deviations
Deviations from covered interest rate parity are a puzzling feature of foreign exchange markets. I present a model of the FX market featuring two components which jointly explain the observed phenomenon - the deviations. The first component is regulatory costs due to one-sided market pressure and the implied accumulation of positions on the providers’ balance sheets. They lead to the observed deviations. After accounting for these balance sheet costs, the parity deviations reflect not an arbitrage opportunity anymore but are costs which were not taken into account. The second component is small interest earnings arising through differences in the commercial paper rate, the Libor rate, and the risk-free investment rate. The interest profits decrease the overall costs.
The model is estimated and tested for the USD/Yen deviations using cross-currency swap data. The fluctuations of the interest earnings are the main driver of the fluctuations of the parity deviations. The measured balance sheet costs are in line with the observed capital costs under the Basel III regulations. In addition, the model results are confirmed on a broad basis by adding the first difference in the interest earnings as an explanatory variable to the multi-currency regression run by Avdjiev et al. (2019).
The economic limits to Tokenisation (BIS project)
with I. Aldasoro, S. Doerr, L. Gambacorta, and P. Koo-Wilkens
Other Projects
Exercise Manual to Macroeconomic Analysis
with D. Niepelt, L. Driussi, and C. Lardy, The MIT Press, 2019
Data Project: Development of a Methodology to estimate the Country Breakdown of Swiss Tourism Exports and Imports
data is regularly published on the SNB data portal (link), 2018
The Effects of a Countercyclical Capital Buffer in a DSGE Model for Switzerland
master thesis, 2017
Marktanalyse und Abschätzung der Marktentwicklung von nicht-medizinischen genetischen Untersuchungen
translated English title: Market Analysis and Estimation of the Market Development of non-medical genetic Testing
with M. Frey on behalf of the FOPH, 2015